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European Commission: Eurozone to Flatline in 2013

The euro zone economy will barely grow next year but pick up in 2014, the European Commission said on Wednesday, forecasting slower growth than governments in all the bloc's biggest economies expect.

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The European Union's executive Commission said the 17 countries sharing the euro would grow only 0.1 percent in 2013 after a bigger than previously forecast 0.4 percent contraction this year as a result of the sovereign debt crisis.

Growth is predicted to rebound to 1.4 percent in 2014 as structural reforms now under way start bearing fruit.

"It is quite normal that governments have somewhat overly optimistic forecasts of economic growth, we see it over the years that there is a systematic error towards optimism," EU Economic and Monetary Affairs Commissioner Olli Rehn said.

The Commission said 2012 would be weaker than expected because the sovereign debt crisis took a turn for the worse and markets began worrying that the euro zone might disintegrate, at least until the European Central Bank changed the terms of the game.

ECB President Mario Draghi said the bank's plan for unlimited interventions in sovereign debt markets, announced in September, should put investors' minds at ease.

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He said the euro zone was stabilising and investors were beginning to reinvest in the currency bloc.

"Our actions have to send a clear signal to markets that their fears about the euro area are baseless," he said in Frankfurt on Wednesday.

REBALANCING ACT

Starting from a weak point, growth in 2013 would be almost non-existent and any expansion would be mainly thanks to net exports, which will benefit from a recovery in global demand, the Commission said.

Domestic demand will make no contribution to growth well into 2013 as households curb spending amid record high unemployment and higher taxes imposed as part of fiscal consolidation efforts by governments.

Government spending cuts made to regain market confidence will bring the overall budget deficit for the area down to 3.3 percent of gross domestic product this year from 4.1 percent in 2011. The shortfall will fall further to 2.6 percent next year and 2.5 percent in 2014, the Commission said.

"Europe is going through a difficult process of macroeconomic rebalancing, which will still last for some time," Rehn told a news briefing. "Europe must continue to combine sound fiscal policies with structural reforms to create the conditions for sustainable growth to bring unemployment down from the current unacceptably high levels."

The Commission published less optimistic growth forecasts for all the biggest euro zone countries than those their governments have made.

Germany, the biggest economy in Europe, would grow 0.8 percent in 2012 as Berlin expects, and by the same again in 2013, rather than the 1 percent forecast by the government.

The bloc's number two economy, France, would grow only 0.2 percent this year and 0.4 percent in 2013, rather than the forecasts from Paris of 0.3 and 0.8 percent, respectively.

The French budget deficit would be 3.5 percent of GDP in 2013 and 2014, unless policies change, rather than the 2.5 percent and 2.0 percent forecast by Paris.

Asked to explain the divergence, Rehn said France and the Commission differed on the timing of a pick-up in consumer optimism.

"We cannot expect such an improvement until 2014, so the Commission estimates that domestic demand will remain depressed in 2013," Rehn said. "In 2014, a recovery of investment and consumption would lead to a GDP increase of 1.2 percent."

ITALY BETTER THAN SPAIN

Italy will contract 0.5 percent next year after a 2.3 percent recession in 2012, more than double the 0.2 percent fall which Rome sees next year.

Italy's deficit will ease only to 2.1 percent next year, without a policy shift, rather than to the 1.8 percent expected by Italy.

Spain, under market pressure to seek help from the euro zone rescue fund, will suffer a recession almost three times deeper at 1.4 percent in 2013 than the 0.5 percent contraction predicted by Madrid, unless it takes additional steps.

Its budget deficit will miss agreed targets, easing to 6.0 percent in 2013 from 8.0 percent seen this year and rising to 6.4 percent in 2014, the EU executive said.

Madrid forecast in its September draft budget, that the deficit would be 6.3 percent this year and 4.5 percent in 2013.

Rehn said the European Commission would focus on Spain's structural, rather than nominal, budget gap in assessing if Madrid has taken effective action to cut the shortfall under the European Union's disciplinary procedure, which could end up in fines for Spain.

Bucking the trend, the Commission said that Greece, which is struggling to clinch a deal with international lenders to unfreeze emergency loans without which it will default, will enjoy stronger economic growth than Athens itself expects.

The Commission forecast that Greek debt would reach 188.4 percent of GDP in 2013, up from 176.7 percent this year -- an amount that is unsustainable and needs to be cut.

Rehn told Reuters in an interview that lengthening the maturities of official loans to Greece and lowering interest charged on them could help reduce debt, but a haircut on the loans was not on the agenda and was not needed.

The Greek parliament had to pass structural and fiscal reform packages on Wednesday and at the weekend for talks on unfreezing the loans to move forward.

The EU executive believes the Greek economy would contract 4.2 percent next year after shrinking 6 percent in 2012 and grow 0.6 percent in 2014.

The Greek government is assuming a contraction this year of 6.5 percent, 4.5 percent next year and that growth in 2014 would only be 0.2 percent.